Income tax proceedings under Section 144B barred after Resolution Plan approval under IBC

The Delhi HC held that income tax proceedings under Section 144B cannot be initiated against a company after approval of its Resolution Plan under the Insolvency and Bankruptcy Code. The court ruled that once a Resolution Plan is approved, it creates a "clean slate" and freezes all prior liabilities, barring any assessment or reassessment of income for periods before the plan's approval. The court rejected the distinction between voluntary and involuntary corporate insolvency, stating that Section 31 of the IBC binds all creditors including government authorities. The tax department's failure to file claims during the Corporate Insolvency Resolution Process cannot justify subsequent proceedings under Section 144B.

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Issues Involved:
1. Validity of Notices Issued u/s 144B, 143(2), and 142(1) of the Income Tax Act.
2. Applicability of Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC).
3. Jurisdiction of Income Tax Authorities Post-Approval of Resolution Plan.

Summary:

Issue 1: Validity of Notices Issued u/s 144B, 143(2), and 142(1) of the Income Tax Act

The petitioner impugns notices issued u/s 144B of the Income Tax Act, 1961 [Act] for Assessment Year [AY] 2021-22 dated 27 June 2022, and consequential notices u/s 143(2) and 142(1) dated 28 June 2022 and 05 September 2022, respectively.

Issue 2: Applicability of Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC)

The petitioner contends that once the Resolution Plan is duly accepted, the bar created in terms of Section 31 of the IBC would apply, depriving respondents of the jurisdiction to reopen or assess income for any period prior to the approval of the Resolution Plan, as supported by the Supreme Court decision in Ghanashyam Mishra and Sons Pvt. Ltd vs. Edelweiss Asset Reconstruction Company Ltd. (2021) 9 SCC 657.

Issue 3: Jurisdiction of Income Tax Authorities Post-Approval of Resolution Plan

Upon the commencement of CIRP and the subsequent approval of the Resolution Plan by NCLT on 15 March 2022, the respondents initiated proceedings u/s 144B on 27 June 2022. The court noted that a Resolution Plan, once approved, brings the curtains down on any claims pertaining to a period prior to its approval. This position was reiterated in Ireo Fiverriver Pvt. Ltd. v. Income Tax Department & Anr. W.P.(C) 12461/2022 and supported by the Supreme Court judgments in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta.

The court emphasized that Section 144B actions could lead to re-computation of liabilities, which stands frozen by the approved Resolution Plan, thereby barred by Section 31 of the IBC. The court found the impugned actions unsustainable.

Addressing a contrary judgment by the Madras High Court in Dishnet Wireless Ltd. v. Assistant Commissioner of Income Tax (OSD) 2022 SCC OnLine Mad 3643, the court respectfully disagreed, noting that the IBC does not distinguish between voluntary and involuntary insolvency in terms of protections offered.

Conclusively, the court allowed the writ petition, quashing the impugned notices dated 27 June 2022, 28 June 2022, and 05 September 2022.

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